MNI POLICY: Fed's Evans: Can Watch And Wait, But Rates to Rise

By Jean Yung

     WASHINGTON (MNI) - With inflation under control, the Federal Reserve can

patiently take stock of economic data in the first half of this year as it

decides when to nudge its benchmark interest rate higher, Chicago Fed President

Charles Evans said Wednesday.

     He still sees the fed funds rate "eventually" rising to "a touch above its

neutral level," possibly to a 3% to 3.25% range if downside risks dissipate and

economic fundamentals continue to be strong, but indicated there was little

urgency to raise rates.

     Evans, who for a long time advocated a slower pace of rate increases,

shifted his views last fall in the wake of the fiscal stimulus by calling for a

restrictive policy stance to help engineer a soft landing for the U.S. economy.

His remarks Wednesday mark another change in tone after the market turbulence of

recent weeks.

     "Because inflation is not showing any meaningful sign of heading above 2%

in a way that would be inconsistent with our symmetric inflation objective, I

feel we have good capacity to wait and carefully take stock of the incoming data

and other developments," he told business managers in Riverwoods, Ill.

     "I think developments in the first half of 2019 will be very important for

making this assessment of our future monetary policy actions."

     --ECONOMIC CROSSCURRENTS

     There appear to be a number of "tough-to-read crosscurrents in the

economy," Evans said, adding that this was a "particularly treacherous

forecasting period."

     Fundamentals for growth are solid but there are many risks, including

global growth slowdown fears, trade policy uncertainty and possible fiscal

headwinds, he said.

     Financial conditions have tightened on concerns over these risks as well as

fears that the Fed would continue to raise rates. However, the current

tightening in the overall level of financial market conditions may also "reflect

a recalibration by investors as they recognize the economy is now likely

decelerating toward a modest longer-run trend rate of growth," he said.

     Evans said his base case remains that of solid growth at above 2% this

year, with the jobless rate sliding toward 3.5% and inflation near 2%. Tight

labor markets should pressure prices slightly higher over the next few years,

but there was little chance that inflation would break out of the Fed's

symmetric target, he said.

     --DATA DEPENDENT

     Rates sitting close to neutral and two-sided risks to the outlook warrant

"cautious data dependence" from policymakers, Evans said.

     "We will need to be mindful of carefully weighing the various crosscurrents

and discerning the more fundamental changes in the economic and financial

environment -- in either direction," he said.

     It is also incumbent on the Fed to "effectively communicate how our

assessments and policy views bring us closer to achieving our dual mandate

goals," he added.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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